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Early-Stage Drugs: Australia to Galapagos
10/22/2014 10:00 am EST
Vivian Lewis looks across the globe for intriguing investment opportunities. Here, the editor of Global Investing newsletter discusses a trio of lesser-known drug development stories—companies focused on treating a range of diseases such as HIV/AIDs, cancer, and cystic fibrosis.
Steven Halpern: How are you doing today, Vivian?
Vivian Lewis: I’m surviving. The market may not, but I am.
Steven Halpern: As we speak, it’s been a few days of very sharp moves in the stock market, both in the US and abroad. On the downside, I was wondering if you could update our listeners as to your outlook from here.
Vivian Lewis: Well, they don’t ring a bell at the bottom to quote the famous Wall Street saying, so I don’t know it’s over or if it isn’t over. It ain’t over until it’s over but there are a few little hints where the biggest selloff has been.
The Dow Jones has gone down further then the smaller-cap indices like the Russell 1000, the NASDAQ, or even the S&P 500 (SPX). It’s the big stocks that are falling; the household name Dow Jones average biggies.
Steven Halpern: So would that suggest to you that for somebody looking to take position that maybe the small-cap area is the place to be looking?
Vivian Lewis: I would say that that’s a good conclusion, Steven. It was the Dow Jones stocks that did best, so far, this year and, indeed, in the whole recovery since the great global selloff. So to some extent this is a reversion to the mean for those stocks.
The Dow is suffering more than other nooks and crannies and the dollar is also not holding its strength as well, so both of these are reasons to be looking abroad, which is, of course, what we do professionally and also to be considering smaller stocks.
Steven Halpern: So, in your model portfolios you include stocks from virtually anywhere across the globe, however, in most cases, you recommended investors focus on ADRs rather than buying directly on foreign exchanges. Could you explain the rationale behind that strategy?
Vivian Lewis: Well, I just had a very bad experience with my broker. I bought with them earlier this year, three Chinese stocks that were trading on the London Exchange; that’s to say, there were no ADRs and they have just stopped providing pricing or trading for these stocks.
So that means that unless I can open an account in London—and that isn’t easy for an American who is a US resident, and a US citizen, and a US tax payer—because the paperwork is now monstrous.
So, the net result is I have three positions; thankfully very small but I can’t do anything about. I have to trade them in the US and they are waiting for me, the bid-ask spread is over 100% and, you know, it’s obviously going to be a loser.
Steven Halpern: So, with ADRs, someone doesn’t run that risk?
Vivian Lewis: Well, they still have illiquidity and they still may be high risk stocks by definition, but at least there is somebody trading them in most cases. Some ADRs don’t trade very often either and, in fact, sometimes you are better off with the bond stock that is trading in the US rather than the formal ADR. If you ask me about that, I can tell you a case right now.
Steven Halpern: Okay. Would you share your thoughts?
Vivian Lewis: Well, I told you I was going to talk about really risky stocks because—ironically enough—they’ve done better than the big kahunas in the Dow Jones in the recent selloff and one of the stocks I like is trading two ways; it trades over the counter both as an ADR, a sponsored ADR, and the foreign stock, which is from Europe; it’s a Belgium company.
And the reason they call themselves that is that are working on genetics, genomics, and, of course, the thing that was discovered there was that even if you just go from one island to the next you get different species of turtles and birds so that’s how they got the name.
Steven Halpern: Now what, what kind of markets would they be addressing, in terms of genomics?
Vivian Lewis: Well, the idea is that they are looking for ways of correcting molecules in the human body that cause diseases, it sounds very high tech but it isn’t.
The diseases that they are working on include cystic fibrosis—which is a nasty disease that kills children—in effect, because their bodies do not handle breathing and fluids properly.
What they’ve developed is a deleter of a cystic fibrosis marker, which they combined with an activator and the two together—we hope—deal with the mutation that causes the disease.
And it’s not like you take it forever. You take it and it changes the cells in the child’s body. They got money for that from the Cystic Fibrosis Foundation, which is desperately looking for a cure.
It may not work in every variant of this disease because it has a whole lot of molecular variants that cause the problem, but, you know, it’s very hopeful and Galapagos is working on this.
They are also working on inflammation diseases like rheumatoid arthritis, again, finding bio-molecules that can change the genes in the sick person and, you know, potentially this is incredible but it’s also high risk because they’re still doing most of the work at the level of Phase I genetic trials.
They’ve got money from various large companies but they tend to issue new stock regularly because they need more money to do all the work they’re doing. So, it’s, it’s risky.
Steven Halpern: I know you also follow the broader pharmaceutical sector. Could you perhaps briefly highlight some names in that area that our listeners could consider?
Vivian Lewis: One I like is Israeli and it’s called Compugen and it’s out actually on NASDAQ rather than over the counter. The ticker symbol is (CGEN).
They’re working on a therapeutic protein, a form of monoclonal antibody that works against cancer, specifically against breast cancer and they’re working with, they have a contract with Bayer which is a very large German chemical and pharmaceutical firm that has now resulted in them getting two milestones.
You get a milestone if you achieve certain steps in the lab and once you achieve those the milestones end, the product reverts to the large company that wants to bring it to market and they pay you an even bigger sum.
So, it’s a kind of a way to copy the big firms and they are not doing that much research in house anymore and find smaller-caps in exotic places like Israel or Belgium that are finding new mechanisms for dealing with human illnesses on the genetic level. I have a third one if you want that just came out?
Steven Halpern: Yes, please.
Vivian Lewis: And it’s not higher—it’s collapsed. It is out of Australia—and Australia is full of short sellers. It’s a national characteristic.
It’s called Benitec (BTEBY) and they’re working on a kind of a vaccine that will attack again, cancer cells, and also deal with HIV; the precursor of AIDS and also hepatitis C.
So they have lots of stuff in the pipeline and they have a patent on another gene silencing thing; it’s not using DNA—it’s using RNA which is what DNA is made by and that may avoid some of the nasty side effects of DNA.
Their patent is for something called DDRNA which stands for DNA directed RNA and then behind it you put a a silencer. So it’s DDRNAS.
Anyway the stock came out at about $5.75 and it’s in the range of $2.70 today which is really awful because they are getting good results, again in breast cancer and again with a big company doing the work on the contract using their patented discoveries.
Steven Halpern: Again, our guest is Vivian Lewis, editor of Global Investing Newsletter. Vivian, thank you so much for joining us.
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